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Deductive fallacy

Rochester Business Journal

August 17, 2012

Mitt Romney's tenure as CEO of Bain Capital ensured that outsourcing would be an issue in this year's election campaigns. So many Democrats no doubt welcomed the Republican filibuster last month that killed the Bring Jobs Home Act.

Not that they would admit it. Publicly, they would stress the importance of enacting it-as Rep. Louise Slaughter, a co-sponsor, did a week ago in a campaign stop at Hickey Freeman's factory in Rochester.

Or as the White House put it in a statement supporting passage of the bill: "The nation's tax code does too little to encourage job creation and investment in the United States while allowing firms to benefit from incentives to locate production and jobs overseas."

But if the goal is to help the millions of unemployed Americans, the Bring Jobs Home Act would be a poor way to accomplish it.

The bill contained two key elements. One would have provided a 20 percent tax credit for expenses related to moving an overseas business unit to the United States. The second would have disallowed the deduction for expenses associated with sending a U.S. operation abroad.

Let's be clear: Current law has no specific incentive or tax break for outsourcing. A deduction is allowed for ordinary and necessary business expenses, among them costs associated with relocating business units.

At a time when nearly everyone agrees the tax code needs to be cleaned up, this measure would have added complexity. Moreover, as Harvard University economics professor Edward Glaeser has noted, companies could easily "game" the law. For example, they might establish a business unit in a low-cost foreign country just long enough to reap a 20 percent credit for relocating it stateside.

The legislation's potential for boosting U.S. jobs also must be questioned. The non-partisan Joint Committee on Taxation said the deduction disallowance would generate only $14 million a year. As a way to accelerate job growth, that would not move the needle.

In Mr. Romney's time at Bain Capital, it invested in companies that expanded abroad, sometimes costing U.S. jobs-but at other times putting more people to work in this country. The merits of each move can be debated. But in a global economy, simplistic approaches to boost U.S. jobs rarely work as intended.